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Clair’s assessment of rail freight is interesting, since his point of view is based on a cross-functional education with elements of logistics, law, business administration and transportation. The ideas he has presented resurfaced in a library stacks research project I have conducted over the past two years. It’s offered in parts here as 2019 closes with U.S. railroads trying to rebalance their strategy for growth and market share heading into the 2020-2030 decade. This is being done with a backdrop of declining demand for freight rail.
Original remarks from Lee Clair are available on his presentation at a November 2017 Stifel Capital Markets conference:
Let’s start with positive information. Yes, there clearly was a freight rail renaissance period prior to 2007 when there was traffic unit growth. When did that occur? Federal Reserve Bank of St. Louis (FRED) charts show that growth period. U.S. government transport records show that customer business tendered to railroads as carload units. Note: Intermodal is excluded from both Figure 1 and Figure 2.
Figure 1: U.S. rail carloads, 2000 to 2018
There was carload unit growth going into 2006. Then the pattern began to fall—into the Great Recession of 2007-2008. Since then, there have been only two brief growth periods—2009-2012 and 2014-2016. Figure 2 refocuses our eyes on the shorter-term carload pattern between 2014 into early 2019. The biggest single decline in carloads took place in the coal sector. (Note: GDP recession periods are shown as gray shade on the FRED graph.)
Figure 2: U.S. rail carloads, 2014 to 2018
Conversely, rail intermodal volume has grown since 2006. Intermodal has been a success story. But that growth stalled in 2019. The reasons are complicated. The message is that entering 2020, the railroad view of intermodal growth is not clear. No one seems to be ordering more intermodal railcars. There are multiple signs of unused intermodal capacity in 2019. One sign is lower rail intermodal spot prices (Figure 3) in selected cross-country corridors than the competition’s corridor spot intermodal prices.
Figure 3: Intermodal spot rates are significantly below year-ago levels, indicating capacity availability. Source: FreightWaves SONAR
Sticking with carloads, what is that segment’s message? How much market position does carload freight have and how much relevance for growth? Answers are tough to come by.
Railroad corporate profits have improved despite the decline in coal carloads and the overall flattening patterns of other types of carloads. Railroad company executives “expect” volume to return in the future as they ratchet their internal costs down further and increase their corporate net cash flow. However, a due diligence review finds very few instances historically whereby a significant lowering of railroad company internal costs automatically translated into a larger customer traffic volume growth.
There is, however, evidence of customers using more railroad service when the railroads shared part of their internal rail company savings with customers by lowering rates. Is that happening in 2019? Are U.S. railroads splitting the cost savings from their internal cost restructuring—sometimes under the guise of so-called Precision Scheduled Railroading changes?
A survey of logistics literature suggests that rail freight carload rate cutting is not being reported. Might rail managers adopt selective rate cutting to increase overall reported future net cash flow and market share volume into the next decade? There are not yet many signals of a pricing strategy.
How serious has carload traffic erosion and slowing of growth been? One way to answer is to use a series of classic “what-ifs” to consider the relative market size position of rail carload traffic that “might have been.” This is where Lee Clair’s insight comes in.
Clair observes that the 2015 U.S. economy was about 75% larger than it had been in the base year of 2000. If we mentally adjust that downward for inflation, we might moderate this to a calculated 30% to 40% growth in the economy. On a carload basis, railroads didn’t keep pace.
Where have railroads been succeeding? It is in the financial area. U.S. railroad management success between about 2004 and 2014 was in pricing leverage. In that recent decade, nominal rail prices increased significantly. Analysis by T&LA shows that between 2004 and 2014, rail prices stated in average price per ton-mile increased by about 5%. That was despite the Great Recession period shown in Figure 4.
Figure 4: Long-term Purchasing Managers Index chart. Source: Association of American Railroads
That is in marked contrast to the public relations aspects surrounding the lowering of railroad rates after the passage of regulatory freedoms under the 1980 Staggers Rail Act. During the immediate post-Staggers Act period, rail freight prices declined by about 1% per year. But this rate-reduction story line—a very good one—has apparent